When a wealthy spouse makes a lump sum payment to the non-moneyed, it’s paid as what’s called a distributive award. Distributive award has no tax consequences for either party. One of the more useful tools in resolving support related issues is the tax deduction benefit available to a spouse making a stream of maintenance payments in accordance with the requirements of the internal revenue code.
Since maintenance is paid by a spouse with a higher earning capacity, and presumably a higher tax bracket, to a spouse with a lower earning capacity and lower tax bracket, there’s a tax savings incentive which enables a moneyed spouse to make a higher support payment with a net savings that is not available if some distributive award is made. They can deduct from their taxes the maintenance paid to the lower earning former spouse.
Maintenance over several years likely enables the paying spouse to maximize his or her tax benefit. Oftentimes we can structure settlement terms within the tax rules such that the least amount of taxes will have to be paid.
James Nolletti is a White Plains divorce lawyer and founder of Nolletti Law Group. James has over 30 years of experience in providing excellent service to individuals going through divorce who have complex divorce issues and significant assets. For more information on James and his firm please visit NollettiLawGroup.com.